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Hindenburg_disasterThe greatest credit balloon in history is coming down like the Hindenburg. The sheer volume of hot air issuing from wealthy gasbags in the media, politics, and finance should be enough to keep the bubble afloat. Alas, that appears not to be the case.

The consensus among well-connected, high net worth hot shots all over the country is nearly unanimous. We need the U.S. government to pluck our bacon out of the fire. The question that springs to the mind of this poorly connected, low net worth scrivener is “Who is ‘we’?”

Much has been written about the “root cause” of the problem. Fingers are pointing in a flurry of blame fixing and blame dodging. Corporate greed appears high on the list of villains. Greed, however, is nothing new. Humans have been greedy for as long as there has been enough stuff to be greedy about. Yet before now, human greed has not threatened to cause world economic collapse.

Lack of government oversight is another popular complaint. We should note, however, that government and private regulators are hardly facing extinction. Currently the United States Treasury, the Federal Reserve Bank, the Security and Exchange Commission, the Commodity Futures Trading Commission, the Federal Trade Commission, the National Futures Association, the World Bank, the International Monetary Fund, and surely many more I’ve never heard of have their fingers in every financial pie on earth. It’s hard to imagine that a few more bean counters and paper pushers would be much help.

The opposite is more likely. Politicians produce regulations for political reasons. Politicians since at least the middle of the 1930s have actively encouraged increased public and private debt in the United States and the world. Fannie Mae itself was a product of the New Deal. Its stated purpose was to enable more Americans to own homes. What it was in fact was an engine for creating credit money. It ran with increasing efficiently, right up to the moment the motor raced out of control and seized up. At every step along the way, regulators were making it easier to lend more and more to people who were less and less able to repay it.

The dizzying tower of debt started looking a little shaky a few years ago. Regulators stepped in, not to recommend taking a few floors off the top, but to help outfits like Lehman Brothers and Goldman Sachs figure out how to make the rickety, swaying spire of empty promises taller still. They cut capital requirements. The new rules allowed already highly leveraged banks and financial firms to start making bets at odds you can’t find at a crap table.

Regulators always become friends and colleagues of the regulated. Having more regulators just increases the number of players at the member guest golf outings. It never protects the public from the decisions made in the clubhouse.

And, of course, the old whipping boy, capitalism, is coming in for its usual abuse. The claim is that capitalist free markets unchecked by selfless politicians and wise central bankers invariably run amok, trample the little guy, and finally founder on shoals of avarice and stupidity. Never mind that such assessments are self-serving for the socialists who claim to be smarter than the free market, and far smarter than any of you poor fools in the public. Never mind that every planned economy from the Soviet Union to Cuba has shown beyond a doubt that they don’t work. Never mind that anything even resembling a free market in banking and finance hasn’t existed in the U.S. since the founding of the Federal Reserve. Capitalism still takes the rap.

Markets, unfortunately for those who would manipulate them, are not political creatures. The laws that drive markets are more akin to those of physics than those of the FTC. A failure to understand them, and a desire to manipulate them, no matter how ardently held, will not produce results that are not in keeping with those laws.

At the core of the world crisis today is debt, an unfathomable sea of debt. Debt that can never be repaid. The Federal Reserve Bank, a privately owned banking cartel with a special relationship to the U.S. government, has been at the heart of debt creation in the U.S. since 1913, and in the world since the U.S. renounced the gold standard
in 1971. Money created out of thin air the form of bank loans, credit swaps, and a hundred flavors of derivitives has flooded the world since then. Foreign banks have used U.S. debt as “reserves” to inflate in turn their own currencies by creating even more debt.

More debt means more money in circulation. Everybody feels richer because everybody has more money. But money is not wealth. It is only a claim against wealth. Real wealth is the product of human effort, the burgers, the beer and the bullets that people want.

Even though we feel richer, more debt makes us poorer if it is not productively invested. Americans have invested their new debt poorly. We bought consumer goods like houses, cars, boats, and sushi. Consumer goods depreciate from the day they are made. They produce nothing, but the debt used to buy them remains long after they are gone. Funds from public borrowing are similarly squandered and often with considerable bloodshed. 

Adding debt to an economy gives a boost to everyone. It’s like spiking the punch at a party. A little can be a good thing. It loosens us up a bit. Puts a smile on our faces. Gets us out onto the dance floor. But the Fed and Uncle Sam kept freshening up that punch bowl long past the time when we should all have been calling cabs for a ride home. A couple years ago there was a half naked dancer on every table and a lampshade on every head. And still they sloshed more hooch into the bowl.

What’s happening now is that a lot of us are waking up. Our heads hurt. The TV is way too loud. We’re wondering exactly what we did last night. And who is that in the bed next to us wearing a silk thong with the word MORTGAGE embroidered on it?

It’s time for some aspirin, a good breakfast, and a call to the office, but Uncle Sam has his own idea about how to cure a hangover. He’s sure the best idea is to simply stay drunk. He’s unconcerned that you will eventually wake up in the gutter because by then he’ll own your house and you will depend on him for your every need.